Compliance and Regulatory Oversight

As was noted at the start of this chapter, a regulatory system is not just about standard-setting but also the implementation and enforcement of such standards. Historically, issues of compliance with international auditing standards were not given enormous emphasis at the global level—reflecting a range of factors, including the desire to increase the number of countries adopting such standards, a limited level of available resources, traditions of self-regulation and professional peer review, and the clear positioning of responsibilities for compliance, regulation, and oversight activities at the national rather than the international level.

One of the most active and visible initiatives in this area has been the ROSC (Reports on Standards and Codes), program set up by the IMF and World Bank in 1999, which examines the degree to which emerging and developing countries are using key standards and codes (defined to include ISAs and IASs as benchmark standards for each individual country’s reports on accounting and auditing practices). The formal remit is to: “annalyze comparability of national accounting and auditing standards with international standards”; and “assist the country in developing and implementing a country action plan for improving institutional capacity with a view to strengthening the country’s corporate financial reporting regime”.8

IFAC increased its focus on global compliance issues with the launch in 2004 of its compliance program, overseen by the Compliance Advisory Panel (CAP), which seeks to ensure that member bodies are meeting their membership obligations. Formally, this program has three main elements, comprising: an assessment by each member body of their country’s regulatory and standard-setting framework; a self-assessment questionnaire of the extent to which each member body is using its best endeavors to adopt international accounting and auditing standards, and maintain quality assurance and enforcement regimes to ensure such standards are applied in practice; and the development of action plans to further the global accounting and auditing standards convergence process, and address any issues/weaknesses identified in the self-assessment questionnaire. IFAC, “in the interests of transparency”, has chosen to post all the responses received from member bodies on its website, for full public access.9

These initiatives are dealing with the general issue of compliance, but not with the actual compliance of a particular audit firm with ISAs and other standards. In reaction to the problematic audits of Enron, Global Crossing, and other large companies, in July 2002, the passing of the Sarbanes-Oxley Act replaced the self-regulation of the US auditing profession with a system of independent inspection by the Public Company Accounting Oversight Board (PCAOB). Similar initiatives have followed in other countries, and there is a whole new international emphasis on auditor oversight as an essential feature of audit regulation. This oversight is, for obvious reasons, done at local level on a national basis. However, the Sarbanes-Oxley Act did not exclude foreign registrants on US stock exchanges from the requirement for oversight by the PCAOB. This appears to have encouraged a number of large countries to establish their own auditor oversight systems in the hope that there will be mutual recognition of each other’s systems. This, however, has only occurred to a small extent, resulting in a considerable amount of extraterritorial activity by the PCAOB audit inspectors.

The issue of public oversight developed further on the international stage through the establishment in September 2006 of the International Forum of Independent Audit Regulators (IFIAR).10 IFIAR is committed to sharing knowledge and experiences of the audit market and associated regulatory activities between independent national audit regulatory agencies. It seeks to promote collaboration and consistency in regulatory activity and to act as a platform for dialogue with other organizations with an interest in the quality of auditing. There are currently 28 independent national regulators who are members of this new international organization, including the PCAOB. Observers at IFIAR meetings include the FSF, IFAC’s PIOB, IOSCO, IAIS, World Bank, European Commission, and the Basel Committee, again reflecting the increasingly interlocking nature of international regulatory relationships.

The multi-layered nature of such regulatory arrangements is well illustrated by the fact that the European Union itself had previously established a European Group of Audit Oversight Bodies (EGAOB) in December 2005, with the specific remit of ensuring effective coordination of new public oversight systems of statutory auditors and audit firms within the European Union.11 The press release announcing the EGAOB development cited the view of Commissioner McCreevy thatthis “group will help to make public supervision systems a reality in all 25 member states, promoting practical day-to-day cooperation as it goes along. It is a key initiative in our drive to bring EU audit rules into the 21st century and restore faith in the profession”. The European Commission recently reiterated its views on the importance of public oversight, with a recommendation (May 13, 2008) on external quality assurance for the statutory audit of public interest entities. This expands the responsibilities of public oversight boards and emphasizes that they should play an active role in the inspections of audit firms.